Sovereign Debt: Notes on Theoretical Frameworks and Policy Analyses

Bankruptcy is one of the central institutions of capitalism. Without bankruptcy, limited liability firms could not have arisen; and arguably, without limited liability firms, capitalism, at least as we know it, could not have developed.1 In spite of its importance,
the subject has, until recently, received scant attention either from micro-economists or macro-economists.2 Arguably, one of the reasons for the dismal performance of IMF policies in the East Asian crises was their failure to take into account adequately the
implications of those policies for bankruptcy, and the implications of bankruptcy for both aggregate demand and supply. 3 In the context of that crisis, it was argued that more extensive reliance on bankruptcy and standstills would have been more effective than the
big bail-outs; indeed, it was only with the “forced” roll-over of Korean loans (equivalent to a standstill) that Korea’s exchange rate stabilized. Such measures might have reduced capital outflows out of the country, and this in turn would have led to a strengthening of
the exchange rate. 4

About the Author

Joseph StiglitzCo-PresidentInitiative for Policy Dialogue (IPD)

Joseph E. Stiglitz is co-President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.